CONMED Corporation

Before the conference call begins, let me remind you that during this call, management will be making comments and statements regarding its financial outlook, its plans, and objectives. These statements represent the forward-looking statements that involve risk and uncertainty as those terms are defined under the federal security laws. Investors are cautioned that any such forward-looking statements are not guaranteed for future events performance, or results. The company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under the forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any further looking excuse me, any forward-looking statements that may be discussed during this call, except it may be required by applicable law. You will also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performances from quarter to quarter and year to year on a regular basis. and for the benchmarking against other medical technology companies. Adjusted net income and adjusted earnings from share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earning releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, Con Ed's Chair of the Board, President, and Chief Executive Officer for opening remarks. Mr. Hartman, please go ahead.

Thank you, Lisa. Good afternoon and thank you for joining us for Con Ed's third quarter 2022 earnings call. I'm joined by Todd Garner, Executive Vice President and Chief Financial Officer. Today we will walk you through our third quarter results and our full year outlook. We will then open the call to your questions. Turning to our results, total sales for the third quarter were $275.1 million, representing a year-over-year increase of 10.6% as reported and an increase of 12.1% in constant currency versus the same quarter in 2021. From an earnings perspective during the third quarter, Our GAAP net income totaled $46.1 million. This compares to net income of $14.9 million in the third quarter of 2021. Excluding special items that affected comparability, our adjusted net income was $23.8 million, a decline of 3.7% versus the prior year's third quarter, and our adjusted diluted net earnings per share came in at 77 cents, a decline of 3.8% versus the prior year's third quarter. Looking at the quarter in more detail, the international markets delivered solid results with 9.6% constant currency growth, while the domestic business grew 14.2% reported. With that said, the industry continues to face headwinds. From my perspective, the two largest issues remain less than ideal health care staffing levels and ongoing global supply chain inconsistencies. These issues did not worsen in the third quarter, but we saw only marginal improvement compared to the second quarter. From a sales run rate perspective, the quarter started slowly, and while the September run rate improved, that recovery was not strong enough to achieve our double-digit growth outlook on the top line. Regarding the acquisitions, our first full quarter within DeBones was very positive, and we remain excited about this business. Additionally, we were incredibly pleased to announce and close on the BioRes acquisition in August. We've quickly embraced this business and are laser-focused on progressing clinical study work, training the sales force, and educating our customers on the product. On this last point, I personally attended a large customer event during September. If this meeting was an early indication of customers' enthusiasm for the concept of healing, then our instincts on the BioBrace technology grew well justified in the years ahead. I'll wrap up my comments with a mention of a non-financial goal. I'm proud to announce that ConMed recently published its first ESG sustainability report, which can be found on our website. This report is the work product of a global cross-functional team within ConMed supported by an external third-party expert. Importantly, all of the information in our report has been validated by our audit group. This report will serve as our baseline as we responsibly pursue enhancements to our ESG initiatives across ConMed. I want to thank the ConMed team responsible for this effort. In closing, I'm proud of the ConMed team and the progress we've made both for the short-term and the long-term outlook of the company. With three-quarters of 2022 behind us, we have delivered strong constant currency organic growth and have closed on two high-growth, high-margin acquisitions that have further strengthened our outlook for the future while continuing to navigate a challenging global market. The ConMed Global Leadership Team and our organization around the world continue to perform exceptionally well in an unpredictable environment. I'll now turn the call over to Todd, who will provide a more detailed analysis of our financial performance and walk you through our outlook. Todd? Thank you, Kurt.

All sales growth numbers I referenced today will be given in constant currency. The reconciliation to gap numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance. For the third quarter of 2022, our total sales increased 12.1%. Revenue from the recent acquisitions was $10.3 million in the quarter, putting our global organic growth for Q3 at 7.9%. For Q3, our sales in the U.S. increased 14.2% versus the prior year quarter. Our international sales grew 9.6% for the quarter compared to Q3 2021. Worldwide orthopedics revenue grew 14.0% in the third quarter. In the U.S., orthopedic sales grew 20.4%, and internationally, orthopedic sales increased 10.4%. Total worldwide general surgery revenue increased 10.7% in the quarter. U.S. general surgery revenue grew 11.8%. Internationally, general surgery revenue increased 8.5%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the third quarter, excluding special items, which include charges for acquisitions, debt refinancing costs, amortization of intangible assets, and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the third quarter was 55.9%, a decrease of 130 basis points from the prior year quarter. Last quarter, I said to expect gross margins around 55% for the back half of 2022. In Q3, some mixed issues, including lower capital sales, caused a stronger than expected gross margin. We think some of that mix may swing back the other way in Q4. and the increased currency headwind will impact Q4 margins. With these dynamics, Q4 gross margins could end up below 55%. Research and development expense for the third quarter was 4.6% of sales, 20 basis points higher than the prior year quarter. Third quarter adjusted SG&A expenses were 37.7% of sales, a decrease of 170 basis points from Q3 2021. We are getting the returns on our Salesforce expansion from last summer and expect those returns to increase over the coming quarters. Specifically in Q4, we would expect adjusted SG&A expense to be between 35.5% and 36.0% of sales. On an adjusted basis, interest expense was $7.0 million in the third quarter. We expect interest expense in the coming quarters to be $7.5 million or more depending on future Federal Reserve decisions. The adjusted effective tax rate was 24.9% in Q3, and we think 25% is the right expectation going forward. Third quarter GAAP net income was $46.2 million. This compares to GAAP net income of $14.9 million in Q3 of 2021. GAAP earnings per diluted share were $1.48 this quarter compared to 47 cents a year ago. Excluding the impact of special items discussed earlier, we reported adjusted net income of $23.8 million, a decrease of 3.7% compared to the third quarter of 2021. Our Q3 adjusted diluted net earnings per share was 77 cents, a decrease of 3.8% compared to the prior year quarter. Turning to the balance sheet, our cash balance at the end of the quarter was $33.4 million compared to $53.2 million as of June 30th. Accounts receivable days as of September 30th were 65 days compared to 64 at the end of Q2. Inventory days at quarter end were 222 compared to 192 at June 30th. Nine days of the increase is related to the inventory from the recent acquisitions. The remaining increase is due to building inventory to mitigate supply chain challenges. Long-term debt at the end of the quarter was $1.036 billion versus $982 million as of June 30th. The changes due to the acquisition of Biores during the quarter. Our leverage ratio on September 30th, 2022 was 5.0 times compared to 4.7 times on June 30th. Cashflow provided from operations for the quarter was $25.9 million compared to $21.4 million in the third quarter of 2021. Capital expenditures in the third quarter were $6.7 million compared to $5.6 million a year ago. Now let's turn to financial guidance. We expect reported revenue in Q4 to be between $305 million and $320 million. This includes increased currency headwinds of 300 to 350 basis points for Q4 alone. For the full year 2022, we now estimate the currency headwind to revenue to be between 150 and 180 basis points and reported revenue to be between $1.1 billion and $1.115 billion. This updated revenue guidance translates to organic growth between 11 and 16 percent in Q4 and between 8 and 9 percent for the full year. We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website. We expect adjusted EPS in Q4 between 98 cents and $1.05. That makes our full year 2022 adjusted EPS guidance range between $3.21 and $3.28. The reduction to the full year range from last quarter is due to the decrease in the potential upside in revenue we anticipated 90 days ago. We now expect the procedure growth to be more moderate than we did a quarter ago, and hospital staffing remains a challenge. Inflation and currency are hindering our ability to offset the reductions to revenue. We will talk about our 2023 guidance in January, but we can already see that the recent significant strengthening of the US dollar will create a meaningful currency headwind for 2023. Given the multiple moving factors involved in the calculation, it is difficult to accurately project, but our current estimates are that the impact could now be around 30 cents. Obviously, as we put the 2023 plan together, we will be looking for ways to mitigate this headwind as much as possible. We feel very good about the exciting revenue growth potential from the portfolio we have built, including our recent acquisitions. We are keeping the engine strong while being responsive to the dynamics in the marketplace. When the cost challenges subside, and they will at some point, we are excited about the profitability this improved growth and margin engine can provide. And with that, we'd like to open it up to your questions, and I'll hand it back to Lisa.